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Dietary ingredients ensnared in U.S.-China trade war

The latest round of tariffs proposed by the Trump Administration in its trade war with China includes an extra 10 percent duty for many dietary ingredients imported from China, including minerals, amino acids, proteins and sweeteners.

President Trump’s trade war with China is set to impact many dietary ingredients, with additional 10 to 25 percent import duties on a range of products from minerals to proteins and sweeteners sourced from China.

IngredientsOnline.com, which connects U.S. and other manufacturers and vendors to ingredient suppliers from around the world, including China, has compiled a list of more than 180 potentially affected ingredients in the company’s supply chain, including choline, creatine, xylitol, animal and plant proteins, ribose, phytosterols, hemp seeds and various forms of minerals and amino acids.

"With boots on the ground in China, our teams in Shanghai have identified this list of ingredients that are on the HTS [U.S. Harmonized Tariff Schedule] Code as ‘potentials’ for the additional duty fees that will start at 10 percent," said Peggy Jackson, vice president of sales and marketing for ingredientsonline.com. "Keep in mind this is just the beginning; we're hearing the tariffs can range from 10 percent to 25 percent. It's obvious this will have a tremendous effect on not only the industry but on consumers as well.”

The Council for Responsible Nutrition (CRN) has been working on this issue since Trump released the first tariffs in May and has received lists from its members, sometimes including 30 to 40 or more ingredients potentially affected by the tariffs.

“The cost of sourcing raw material is going to go up in all these cases,” said Steve Mister, president and CEO of CRN. “Sometimes it’s the finished ingredient; in other cases, it’s the excipients or fillers and similar compounds. Each one incrementally increases the cost of goods, the cost to make the products.”

After China responded in kind by increasing import duties on U.S. goods, including agricultural products, the U.S. Trade representative (USTR) proposed to modify the tariff list for imports from China to include an additional 10 percent duty on another $200 billion of Chinese goods, including several dietary ingredients such as minerals, proteins and amino acids.

Arguing China has been using unfair business practices and stealing U.S. technology, Trump has recently threatened to “go to 500,” in an interview with CNBC, referring to his willingness to slap extra duties on every Chinese import, a value of about $505.5 billion last year.

“The cost of supplements for the consumer would go up considerably,” Mister said, if Trump imposed an additional hefty tariff on every import from China.

In the meantime, the July 10, 2018 Federal Register notice on the proposed 10 percent tariffs is open for written comments through August 17, 2018. A public hearing is scheduled for August 20 to 23 at the U.S. International Trade Commission (USITC) in Washington.

The USTR explained, in a separate statement: “In making its determination on each request, USTR may consider whether a product is available from a source outside of China, whether the additional duties would cause severe economic harm to the requestor or other U.S. interests, and whether the particular product is strategically important or related to Chinese industrial programs including Made in China 2025.”

Mister said it’s hard to predict how willing the government will be to grant an exclusion, until the situation plays out further.

“The uncertainty of having to go through the process and file a submission is, at least, an inconvenience and, in some cases, quite burdensome,” he said. “It adds cost to the supply chain to go through the exemption process.”

One of the goals for tariffs is that they raise the price of foreign goods to make domestic goods more attractive.

Mister noted a listed ingredient could be sourced domestically, but for some ingredients it could be difficult, if not impossible, to find a domestic source. “The supplement industry has become dependent on free trade, the ability to source around world,” he noted.

“You can go through the exemption process, but there is a backlog there,” said Dan Fabricant, Ph.D., president and CEO of the Natural Products Association (NPA), who noted some 2,000 such applications have already been filed. “The government might have to hire more people just to deal with these applications.”

Still, Fabricant assured that in addition to submitting comments in writing and in person at the public hearing, NPA will be helping its members with the exclusion process.

Dietary Ingredients Covered Under New Tariff Increases

Among the line items in the proposed 10-percent tariff increase are several forms of minerals including sodium, magnesium and potassium chloride, as well as zinc, silicon and magnesium oxide and sodium citrate.

On the food side, flaxseeds and other oil seeds, including hemp, sunflower and sesame seeds, are on the list, as are the common food additives such as malic and citric acids, and sweeteners such as sugar alcohols (e.g. xylitol), synthetic alternatives (e.g. sucralose) and sugars (e.g. sucrose, ribose). Polysaccharides in general are also listed.

The tariff list also includes “Fatty acids of animal or vegetable origin” as well as numerous species of fish, which would undoubtedly affect the fish oil and omega-3 industry, in addition to the food market. The herbal industry is also in play, as all manner of phenols and sterols are listed for the additional 10 percent tariff.

Leaning into the sports nutrition world, protein concentrates—including whey and plant-based varieties—are also on the tariff list, as are ribose and choline. The list also contains catch-all lines for aromatic (e.g. tyrosine, tryptophan, phenylalanine) and non-aromatic amino acids (alanine, arginine, leucine, valine, isoleucine, glycine, creatine, etc.) and various forms of creatine (listed under “Non-aromatic imines and their derivatives; salts thereof”).

Fabricant said amino acids are the biggest concern, because almost all such ingredients used in the natural products industry come from China.

The HTS lists amino acids in several categories including aromatic (mostly tryptophan, tyrosine and phenylalanine) and non-aromatic amino acids—further broken into subcategories based on oxygen function. There are at least three different tariffs for the various subcategories for amino acids: 5.8 percent, 4.2 percent and 3.7 percent.

In addition to a complex tariff schedule for amino acids, import data based on these subheadings is not specific to dietary supplements or foods. Nevertheless, available data can provide a glimpse at the potential increased cost of importing these ingredients.

USITC import data showed a total $182.8 million of all the aromatic and non-aromatic amino acids (HTSUS 2922.49.XX) was imported from China in 2017. According to the USTR and USTIC, the additional 10 percent tariff would be ad valorem—the 10 percent is added to the existing tariff—and would result in an extra $18.3 million in tariff collected for amino acids from China, based on 2017 volumes.

Addressing the Trump Administration’s desire to promote more American made ingredients and products, as well as any potential exemption, Fabricant said: “You pretty much have a sole source of supply [from China]. Even if there was an amino acid manufacturer in the United States, could they meet the demand of everyone in the industry? I don’t see how. That would take a long time to scale up.”

Some other examples of potentially larger tariff burden for ingredients commonly sourced from China include glucosamine and protein (e.g. whey and plant varieties such as soy and pea).

USTIC data showed glucosamine (HTSUS 2932.99.90.10) imports from China totaled about $46.9 million in 2017. The tariff rate for this HTS subheading is 3.7 percent, so total tariff collected from glucosamine imports from China last year were around $1.74 million. Trump’s proposed tariff changes would result in a 13.7 percent rate and equal $6.43 million in annual tariff collected, if import volume remains similar. This would mean $4.7 million more added to annual import costs for this one ingredient.

For protein concentrates (HTUS 210610.XX), 2017 imports for China totaled about $39.7 million, per USTIC data. A tariff rate of 6.7 percent resulted in about $2.66 million collected in 2017; an additional 10 percent tariff would result in a 16.7 percent tariff, equaling a total of around $6.63 million tariff collected, based on 2017 import volume.

Tit-for-Tat Tariffs Could Affect U.S. Brands in China

“We’re also concerned about retaliatory tariffs,” Mister said, while acknowledging the increased demand for ‘Made in the USA’ products across Asia, especially China. “The retaliatory tariffs have the potential to affect finished goods going back to China.” The net effect could be increased costs of materials coming in to the United States and decreased amount of product being sold back to China.

A recent survey from FT Confidential Research, a service of The Financial Times, revealed a majority of Chinese consumers (54 percent across 300 cities in China) would “probably” or “definitely” refrain from buying U.S. products due to Trump’s new tariffs on Chinese goods. Only 13 percent of Chinese consumers polled said they would not boycott U.S. goods.

China has a history of boycotting goods and travel to countries engaged in spats with China, including recent squabbles with South Korea, where Chinese tourism fell, and Japan, whose auto exports to China then dropped dramatically.

“We are not selling cars,” Fabricant countered, saying he and his members are not overly concerned about the retaliatory tariffs. “Our history with China is quite different than China’s history with Japan. Nixon opened up China once upon a time. They are our biggest trade partner and we are theirs, so something has to shake out.”

Fabricant explained Chinese consumers have been willing to pay a premium for U.S. goods, which they’ve already been paying for with whey protein and other products. “The White House’s argument is very principled,” he stated. “China can’t pay 2 percent while we pay 25 percent; either it’s 2 percent both ways or 25percent both ways.” For now, Fabricant said no one really knows how Chinese consumers will react until the situation plays out. “But all signs point to there not being slow down of premium [health and nutrition] goods from the United States into China.”

The Road Ahead for Natural Products to and from China

In addition to assessing which ingredients, materials and products will be affected by the tariff increases, a big source of anxiety is in how long this trade war will continue and how will it escalate.

CRN has been working closely with the U.S. Chamber of Commerce on this issue, as dietary supplements and foods are just one of many industries caught up in this trade war.

“Just like how our members come together under CRN, we think it’s important the trade associations work collectively through the U.S. Chamber of Commerce try to have one united voice,” Mister explained. “We’ve cosigned letters with the U.S. Chamber and work with them, as we know these issues cause a great deal of consternation not only to supplement companies, but all U.S. manufacturing industries.”

Similarly, NPA is meeting with Senate and House members to ensure they are aware of these tariff issues and ask for some political support.

“We don’t’ know how things are going to net out; only the White House does,” Fabricant said. “Of course, that’s their prerogative to negotiate this, but at the same time, we have to be prepared if these [tariffs] do come into effect.”